Cobalt Mining

According to the head of commodities trader Trafigura, unregulated cobalt mining cannot be “wished away,” the Financial Times reported last month.

In 2017, nearly 60% of the world’s cobalt was mined in the Democratic Republic of the Congo (DRC), where smaller artisanal mines are often unregulated, leading to routinely unsafe working conditions and, according to reports by advocacy groups, the use of child labor.

According to the U.S. Geological Survey, 64,000 tons of cobalt were mined in the DRC last year out of a global total of 110,000 tons. Cobalt is coveted for its use in electric vehicle batteries.

According to Jeremy Weir, the head of Trafigura, cobalt demand is expected to at least triple by 2025.

“The reality is that there are hundreds of thousands of people in the DRC who earn a living through work in the ASM sector,” Weir was quoted as saying. “It’s illegal in many cases; it’s unregulated and can be very dangerous. But it can’t be wished away.”

Last November, Amnesty International released a report that offered criticism of a number of industry giants, including Microsoft, for a lack of progress with respect to assuring their cobalt supply chains are ethical and conflict-free. Apple and Samsung were listed among companies that had taken “adequate” steps toward that goal.

“Our initial investigations found that cobalt mined by children and adults in horrendous conditions in the DRC is entering the supply chains of some of the world’s biggest brands. When we approached these companies we were alarmed to find out that many were failing to ask basic questions about where their cobalt comes from,” Seema Joshi, head of business and human rights at Amnesty International, was quoted as saying last year.

China Denies Report it is Limiting Rare Earth Output

The country’s sway in the market is significant — one should look no further than the U.S.’s $200 billion tariff list instituted in September.

An original list of Chinese products targeted for tariffs included rare earths — but when it came time to finalize the list, the rare earths were removed.

As such, as the world’s biggest producer and supplier of rare earths, China has considerable influence in the market; anything Beijing does with respect to output of rare earths is important.

According to a Reuters report citing the Shanghai Securities News, the Chinese government recently denied claims that it has slashed rare earth output in the second half of this year.

Reuters had previously reported data suggesting China was slowing exports in an effort to boost prices.

China’s Ministry of Industry and Information Technology, however, denied the claim, according to the recent report.

Lynas Gets a Boost

Meanwhile, outside of China, Australian rare earths miner Lynassaw its shares rise on news that it would be allowed to continue to store waste materials at a Malaysian facility, the Financial Times reported.

The company’s shares rose as high as 8.5% on the news before tracking back for a more modest 0.9% jump, according to the report.

U.S. Construction Spending

The U.S. Census Bureau released data late last week on construction spending for September, showing spending held flat from the previous month.

Construction spending in September reached an estimated $1,329.5 billion, which was up 7.2% from September 2017.

Meanwhile, through the first nine months of 2018 spending was up 5.5% compared with the same time frame in 2017.

Broken down by type, private construction spending hit a seasonally adjusted annual rate of $1,020.4 billion, which marked a 0.3% increase from the revised August estimate of $1,016.9 billion. Within private construction, residential construction reached a seasonally adjusted annual rate of $556.4 billion in September, up 0.6% from the previous month. Nonresidential construction was at a seasonally adjusted annual rate of $463.9 billion in September, up 0.1% from August nonresidential construction spending.

Meanwhile, the estimated seasonally adjusted annual rate of public construction spending was $309.1 billion, a 0.9% drop from August. Educational construction was at a seasonally adjusted annual rate of $74.6 billion, up 1.2%. Highway construction was at a seasonally adjusted annual rate of $95.2 billion, 1.1% below the revised August estimate.

Architecture Billings Growth Slows but Remains Positive

The American Institute of Architects recently released its monthly Architecture Billings Index (ABI), which showed billings growth yet again for September.

The ABI hit a value of 51.1 for the month (anything above 50 indicates billings growth).

“Although the pace of billings growth slowed somewhat from August, billings have remained positive for the entire year so far, indicative of generally strong conditions at firms,” the ABI report states. “The value of new signed design contracts increased in September as well, after a modest decline in August, and inquiries into new projects remained strong.”

By region, the Midwest led the way with an ABI value of 59.7, trailed by the South (54.1), West (51.3) and Northeast (46.6).

The ABI report also includes a monthly survey of industry professionals on a particular topic, this month being revenue and profitability.

For 2018, the answers were mostly optimistic.

“Overall, responding architecture firms anticipate net revenue growth of an average of 7.5 percent for 2018, with more than half of firms (56 percent) reporting that their net revenue will increase from 2017 to 2018,” the report states. “An additional 23 percent expect net revenue to remain about the same as last year, and the remaining 21 percent expect a decline.”

Next year, however, might not be as rosy.

“Architecture firms project net revenue to grow by an average of 3.8 percent in 2019, about half as much as in 2018, with just 43 percent of firms expecting an increase in revenue for the year,” the report continues. “The share of firms expecting a decline in revenue in 2019 is about the same as in 2018 (23 percent versus 21 percent), but one third of firms (34 percent) expect revenue to be flat in 2019.”

U.S. Auto Sales

It’s quarterly earnings reports season once again.

Last week, General Motors reported its third-quarter earnings, posting third-quarter revenue of $38.5 billion, up 6.4% compared with Q3 2017. It also reported EBIT-adjusted income of $3.2 billion, up 25% year over year, and income of $2.5 billion.

GM saw North American sales of 833,712 units. Meanwhile, within the U.S. GM delivered 700,000 vehicles at an average transaction price of $36,000, up about $800 year over year and $4,000 above the industry average. The North American sales total for the quarter, however, was down 9.8% compared with Q3 2017.

“Working with a leading tech partner like Baidu allows us to leverage new opportunities in China to offer innovative solutions that improve safety, convenience and the overall mobility experience,” said Sherif Marakby, president and CEO of Ford Autonomous Vehicles LLC, in a release. “This project marks a new milestone in the partnership between Ford and Baidu, and supports Ford’s vision to design smart vehicles that transform how we get around.”

Fiat Chryslerthis week reported U.S. sales of 177,391 vehicles in October, up 16% year over year.

Honda saw its total sales drop 4.1% year over year in October. Honda truck sales in the U.S., however, jumped 6.5% year over year, while cars fell 14.5%.

Nissan’s October sales were down 10.6% in October year over year, with a 15.4% jump in INFINITI sales and a 13.0% drop in Nissan division sales.

Sales in China

GM’s sales were also down in China, where it sold 835,934 units, down 14.9% year over year. Chevrolet sales in China, however, were up 10% year over year, GM reported, “led by higher content crossovers including the Equinox, which saw 29 percent growth compared to a year ago.”

However’s GM’s Cadillac brand also performed well in China. Cadillac sales were up 4% year over year in the third quarter and are up 20% in the year to date.

Electric Vehicle Developments

“To warm up the cabin, energy must be extracted from the car’s batteries, which greatly affects the electric vehicle’s range,” Ute Maxi, coordinator for the E.U.-funded MAXITHERM project, was quoted as saying. “This limited range – especially in cold weather – is a significant roadblock to the mass uptake of electric vehicles in Europe.”

Although China’s CSI 300 closed up 1.4% this week, it was a bit of a dead cat bounce after a decline of 6% during the month, as this graph from Trading Economics shows:

Source: Trading Economics

The Chinese market has fallen from a peak of around 3,550 to 2,600 over the year. Most attribute the recent minor recovery to yet more promises of infrastructure investment made by Beijing.

But China is not alone seeing stock market volatility.

The Financial Times reports comments made by analysts from Capital Economics, who noted: “While upbeat earnings numbers have helped the US stock market find its feet again in the past couple of days, the bigger picture is that the S&P 500 has tumbled in recent weeks despite healthy earnings. We think that this reflects worries about the outlook for them, which in our view are likely to intensify as actual earnings growth slows sharply next year.”

Those fears seem to have abated for now on the back of stronger earnings results coming out both in the U.S. and Europe, and suggestions the Federal Reserve may not tighten quite so fast has taken the dollar off its highs.

Despite strong fundamentals and producers facing considerable price pressure from rising alumina prices, aluminum has fallen along with other metals, in part due to the strong dollar.

On-warrant stocks of aluminum in LME-registered warehouses have fallen by 1,825 tons to 723,900 tons, but that only tells part of the tight supply market story.

The market deficit has been fed by off-warrant inventory finding its way back on the market. Off-warrant stocks held by the stock and finance trade have fallen from an estimated 10 million tons a few years ago to something closer to 3-4 million tons today. The very opacity of that market makes it very difficult to judge stock levels and, as a result, impossible to accurately estimate the true size of the aluminum market deficit if this supply source were not there.

What it does say is outside of China, aluminum’s medium-term fundamentals are strong. There are very few new smelters being built and limited return of idled capacity, even in the tariff-supported U.S.

They seem to come around periodically. There is a great deal of noise and some volatility in the stock markets, but eventually — whether it is Greece, Spain, Portugal, Ireland, or a combination of several economies — the E.U. seems to have muddled through such crises over the last decade.

Even Brexit is confining its impact to the U.K. economy and has largely left the rest of the E.U. unaffected. But Italy’s latest budget proposals hold the potential for serious disruption, not least because it is the Eurozone’s third-largest economy and a founding member of the trade agreement started in the years after World War II — so its impact is proportionately significant.

So, what is the problem this time, you may ask?

Well, Europe has been slow to recover from the financial crisis of 2008. Debt ballooned in many countries and under the constraints of a fixed currency managed to the advantage of rich northern states like Germany, balance of payments deteriorated as the north imposed austerity on the south (or so many southern states saw it).

The rights or wrongs of the Eurozone’s structure aside, countries like Italy have been constrained for the last decade by fiscal rules set in Brussels. The Italian economy has lagged behind the rest of Europe — unemployment is high and growth is low. As the graphs below courtesy of Stratfor illustrate, the populace has had enough.

Earlier this year, they even surprised themselves by voting in a populist coalition on a platform of radical reform and reflation. That is a policy that puts them at loggerheads with Brussels, which has demanded an Italian deficit reduction that should see the deficit grow by just 0.6%, down from an expected 1.6%, to be achieved by increased austerity measures.

Italy’s new government, a coalition of the Five Star Movement and the League, have presented Brussels with a budget that would see the deficit rise to 2.4% next year, three times higher than an E.U.-mandated target and which Barclay’s Bank is quoted as predicting in The Telegraph will likely exceed 3%, even without a global economic downturn next year.

Italian 10-year debt yields have surged as a result, up near 300 points, not quite at the 400 level seen in the crisis of 2011 but a record four-year high. So far they are only talking about the budget, but nothing has been implemented. After years of QE, banks are holding some €387 billion (U.S. $444 billion) of state debt.

As The Telegraph report observes, banks face mark-to-market losses as yields rise. This erodes their capital buffers, forcing them to curtail lending and further crimping growth. Or, they might have to sell some of their bonds, creating pressure for yields to rise higher.

Either action can quickly turn into a self-feeding “doom-loop,” the paper suggests, as the banks and the sovereign state take each other down.

There is not going to be an Italian sovereign default. Although there are reports of capital flight to Switzerland, it is very unlikely there will be a run on Italian banks as there was in Greece.

However, Italy’s sheer size and core membership of the Euro means Brussels and Rome cannot allow the current standoff to escalate out of control.

Like a runaway super tanker, the situation cannot be easily contained like it was in Greece if the markets genuinely take fright.

You have to have some sympathy for Italy. State spending has always played a massive part in keeping a country together, where geography, history and culture constantly try to tear it apart, a report by Stratfor observed.

Reports of riots in Rome over the appalling state of public services underlines the popular will for public investment, regardless of austerity measures demanded by Brussels. So far, the government has a clear popular mandate to ignore Brussels and go for debt-fueled growth.

Brussels, likewise, is equally set against allowing Italy to buck the rules. The two are on a collision course and set against a backdrop of slowing global growth — outside of the U.S., at least — the economics are not in either party’s favor. Global growth or risk appetite are not going to mitigate the impact of an increasingly indebted Italian economy.

It feels counterintuitive that an industry buttressed by 25% import tariffs would not be riding the crest of a wave, particularly when you read one firm has just settled with its union, agreeing a cumulative 14% wage increase over a four-year period.

Surely that sounds like a firm making bumper profits. Indeed, the same article states, the company in question, U.S. Steel, posted a near 60% increase in pre-tax profits in the June quarter.

President Trump’s trade policy, coupled with a strong economy, has sent domestic steel prices soaring, and finally released a number of high-profile investments in new capacity said to total more than $3.7 billion to be started by the end of this year.

Big River Steel LLC, Carpenter Technology Corporation, ArcelorMittal S.A. and Attala Steel Industries are all set to join U.S. Steel in new investments spurred by the opportunity created by the import tariffs.

Even if, as seems likely, some kind of deal is carved out for Canada and Mexico now the revised NAFTA agreement has been agreed (now called the United States-Mexico-Canada Agreement, or USMCA), removal of the 25% tariff among the three is unlikely to decimate prices, as tariffs remain in place with the rest of the world.

Market leader Nucor is by all accounts doing very well, having booked its highest quarterly profits in the company’s history at $683 million in the second quarter, more than doubled the $323 million total in the second quarter of 2017. Third-quarter earnings, which Nucor reported Thursday, hit $676.6 million, up from $254.9 million in Q3 2017.

U.S. Steel, on the other hand, remains the laggard of the industry, and the markets know that.

Despite record prices — admittedly, we have seen softening since the summer — the company’s stock has continued to underperform, having lost some 40% since March 1, according to CNBC.

But back to Credit Suisse and its industrywide downgrade: is their downgraded view valid?

Much is predicated on oversupply, particularly if deals are struck to remove the tariffs on Mexican and Canadian steel. Although China is often cited as the tariffs’ target, in reality China has not been a major supplier to the U.S. for some years due to early action.

Apart from slab out of Brazil, Canada, Mexico and Russia have been the largest suppliers. If tariffs are removed for these countries, supply will definitely increase and domestic mills may have to reduce margins to fight for demand, which is theirs for the taking this year.

The fact that steel prices have softened this quarter suggests mills are already responding to the new normal.

Prices remain elevated from pre-tariff days, but mills are having to respond to the global price — plus the 25% tariff — environment. Domestic capacity utilization is over 70% — better than, say, China’s, which is hovering in the high 60s — but still far from the 80% and above level mills would like.

You have to hope for U.S. Steel’s sake the tariffs remain in place, not just for months but for years and that the administration does not agree to too many carve-outs.

If the barriers start to leak like a failing dam due to tariffs being removed on USMCA-origin metal and saddled with higher costs incurred by wage deals struck now or investments made on the back of strong current domestic prices, those higher costs (such as inflated wage agreements and debt as a result of significant new capacity investments) may prove too much to support in a lower market price environment.

Under such a scenario, maybe Credit Suisse has a point.

Consumers, naturally enough, are hoping that tariff barriers are removed — and quickly. Our own take is they will be disappointed. So long as the Trump administration remains in power, so too will the majority of the tariffs (at least with the rest of the world outside USMCA).

We may have hit peak steel in the summer and be facing a winter of softer prices. However, the bar has been raised on price competition and domestic mills are likely to enjoy some advantage from that state of affairs for some time to come.

For some years now, many parts of the country have been facing power cuts. Why? Because of a shortage of coal, which becomes even more acute in the monsoon season (which is just about ending in most parts of India).

Northern provinces, including the country’s capital, New Delhi, and those in the central part are susceptible to coal-linked power interruptions, forcing industries to halt temporarily and wreaking havoc on the lives of ordinary people.

India’s single-largest supplier of coal for thermal plants, the state-run Coal India, finds itself at the receiving end because of supply issues, which it, in turn, says is due to unavailability of rail wagons. The firm accounts for about 80% of coal production.

Not only are power plants complaining of the coal shortage — other industries are now protesting loudly, too.

The Aluminium Association of India (AAI), for example, dashed off a letter to the federal government asking it to halt prioritizing coal supply to power plants.

A report in the Indian newspaper The Hindu said excluding other important industries from the coal supply chain was having a detrimental and cascading effect. The reaction comes after the government asked coal companies to send off supply to thermal plants first.

As expected, in these troubled days of import-export between the U.S. and the rest of the world, India’s coal imports shot up by 35% to 21.1 million tons (MT) in September this year, compared to 15.61 million tons in same period last fiscal, according to the Economic Times. Imports were largely of non-coking coal.

Government officials had hoped that this monsoon season it would be a different story compared to some of the previous years. The federal government had assured all that this time there was enough dry coal supply for power plants. At the end of the rainy season, the government’s claim was shown to be untrue.

Incidentally, Coal India registered 15.2% growth in coal production during the first quarter ended June 2018, amounting to 136.87 MT.

One can even claim that an indirect victim of the ongoing U.S.-China trade tariff war is India’s aluminum sector.

Because of the tussle, both countries are sending their aluminum scrap to India. In the AAI’s letter, it pointed out that aluminum smelting needs uninterrupted electricity. An outage of over 2 hours directly affected the functioning of the smelters for a temporary period, affecting bottom lines and yielding lower output.

“In 2018, global steel demand continued to show resilience supported by the recovery in investment activities in developed economies and the improved performance of emerging economies,” said Al Remeithi, chairman of the World Steel Association’s Economics Committee, in a release. “Demand for steel is expected to remain positive into 2019, growing at 1.4% globally.”

Within the U.S., Canada and Mexico, 2018 demand is forecasted to rise by 1.7% in 2018 and 1.0% in 2019. E.U. demand is projected to rise 2.2% and 1.7% in 2018 and 2019, respectively. In Asia and Oceania, demand is projected to rise 5.0% this year and 1.3% next year.

Unsurprisingly, the SRO refers to rising global trade tensions.

“While the strength of steel demand recovery seen in 2017 was carried over to 2018, risks have increased,” the report states. “Rising trade tensions and volatile currency movements are increasing uncertainty. Normalisation of monetary policies in the US and EU could also influence the currencies of emerging economies.”

Of course, that tension has a hand in the projected deceleration of demand growth in China, pending government-led stimulus measures.

“Both downside and upside risks exist for China,” the report states. “Downside risks come from the ongoing trade friction with the US and a decelerating global economy. However, if the Chinese government decides to use stimulus measures to contain the potential slowdown of the Chinese economy in the face of a deteriorating economic environment, steel demand in 2019 will be boosted.”

Elsewhere, the report states the E.U.’s steel demand recovery will continue in 2019, driven by domestic demand.

“With business confidence high, investment and construction continued to recover while the automotive market may see slower demand growth,” the SRO states. “Though the economic fundamentals of the EU economy remain relatively healthy, steel demand in 2019 will show some deceleration over the growth seen in 2017-18, partly due to uncertainties resulting from global trade tensions.”

The outlook for Japan is continued stability, the report states, while South Korean demand is expected to contract in 2018, with only a “minor recovery” projected for 2019.